We Appreciate Sea’s Profitability in Q4 but Growth to Decelerate Very Sharply

We maintain our fair value estimate of USD 70 for Sea SE despite the company reporting significantly better-than-expected profitability due to meaningful cost reductions and greater monetization of its e-commerce business. Sea improved its monetization by 300 basis points, which led to better-than-expected revenue. Combined with operating expense reductions stemming from mass layoffs in the prior two quarters, the company reported recurring operating profit of USD 452 million, compared with the PitchBook consensus estimate of a loss of USD 253 million. While we found its recent profitability encouraging, supported by its 22% share price surge on March 7, the day of earnings—and while the market may enjoy the strategic shift toward profitability—we believe the long-term revenue growth trajectory should now decelerate significantly, leading to a lower valuation despite higher margins. In addition, Sea did not address some of the fundamental issues of the company, such as the continued user and bookings decline of its gaming business and the lack of visibility into its financial services business (which has now transformed into a service provider).

Sea reported revenue of USD 3.45 billion, 14% better than PitchBook consensus of USD 3.10 billion. This was driven by 300 basis points of improved monetization to 10% despite gross merchandise value, or GMV, declining 1% year on year and 6% sequentially. The higher monetization was due to lower subsidies, and this is similar to other loss-making e-commerce platforms that have lowered their subsidies in order to become profitable at the expense of growth. Sea indicated that on a constant-currency basis, GMV increased 7% year on year but also stated it no longer considers GMV an important key performance indicator and will no longer disclose quarterly GMV data. We suspect that GMV growth will slow, and forecast long-term GMV growth at single digits, given Sea’s current strategic focus on profitability over growth.